Preparing a cushion before the US Fed winds up its bond buying programme by mid-2014, the government is considering a slew of measures, including allowing banks to offer quasi-sovereign bonds abroad while further liberalising external commercial borrowings (ECB).
A senior official told The Indian Express that the postponement of US Fed’s tapering has provided more time to the government to work out a robust strategy to offset any potential outflows.
“We have many options on the table. One is allowing banks to raise funds overseas through quasi-sovereign bonds. This would help in forex flow in the country. ECB may be made more liberal while the option of sovereign bonds is also there,” the official said.
The former Governor of Reserve Bank D Subbarao had raised concerns about sovereign bonds. Subbarao had argued that issuing such bonds could compromise the country’s financial stability.
At present, only public sector institutions are allowed to raise funds abroad through quasi-sovereign bonds. Three state-owned financial institutions — IIFCL, IRFC and PFC — have already been asked to raise a total of $4 billion in the current fiscal through bonds.
Quasi-sovereign bonds are those issued by PSUs or other entities backed with sovereign guarantee where costs are borne by the entity and not the government. This means the debt is not taken on government books.
Earlier, the US Federal Reserve, in a pleasant surprise for the markets, announced that it would continue with its monthly $85 billion bond buying programme and wait for more evidence of growth recovery before unwinding the stimulus.
Global markets, especially those in emerging economies, have been critical of US Federal Reserve chairman Ben Bernanke in the last few months as quantitative easing would be wound up by mid-2014.
The apprehensions of tapering the stimulus programme had led to fears of capital outflows, leading to the depreciation of rupee against the dollar and mayhem in the stocks market.
In an effort to sooth jittery investors, economic affairs secretary Arvind Mayaram had said that the government has enough ammunition to tackle the situation.
He had said that the country has close to $270 billion of foreign reserves with the Reserve Bank, close to $40 billion of additional inflow of capital this fiscal year and a $50-billion currency swap arrangement with Japan. A $100 billion contingency fund has also been signed by BRICS (Brazil, Russia, India, China and South Africa) countries, he had emphasised.